Ex-SBP chief shines light on factors behind public debt surge

KARACHI: Former governor of the State Bank of Pakistan Murtaza Syed has emphasized the importance of analyzing debt relative to the size of the economy (GDP) rather than absolute rupee terms.

In his thread on Twitter/X on Saturday, Syed shed light on the factors contributing to Pakistan’s rising public debt. He said that “after 2001, Pakistan benefited from generous debt relief and foreign aid that saw public debt plummet from 62 to 44 per cent of the GDP by 2007.”

In just 15 years, however, it has risen back up to 77 per cent. Syed outlined five key factors influencing public debt as a percentage of the GDP: fiscal discipline, economic growth rate, interest rates, exchange rate fluctuations, and government arrears.

Per Syed, Pakistan witnessed a significant drop in public debt during the Musharraf era (FY2000-2007) due to generous debt relief and foreign aid, particularly post-9/11 US aid estimated at around $15 billion.

“Out of $13 billion owed to the Paris Club, $1.5 billion was written off and debt servicing of the remaining amount was rescheduled by 15 years, pushing out the first repayments all the way to 2017,” he added. These inflows resulted in fiscal surpluses and a stable rupee, allowing for brisk economic growth (average 5.2 per cent) and a decline in public debt by nearly 18 per cent of the GDP.

However, Syed argued that this opportunity was squandered. The newfound fiscal space and foreign aid were not used for investments, export promotion, or productivity-boosting reforms. Instead, they fuelled consumption and imports, leading to a widening current account deficit and culminating in foreign exchange crises in 2008, 2013, 2019, and 2022.

The PPP era (FY2009-2013) experienced continued foreign aid inflows, but these were negated by a lack of fiscal discipline, lower growth rates (average 2.7 per cent), and ultimately, rising public debt (9.1 per cent of the GDP).

The PML-N era (FY2014-2018) saw a more moderate public debt increase (6.6 per cent of the GDP) due to improved fiscal discipline in the first three years and higher growth (average 4.4 per cent).

However, maintaining an artificially strong rupee led to a decline in exports and a widening current account deficit, ultimately leading to the 2019 crisis.

The PTI era before the vote of no-confidence (FY2019-2021) saw a rise in public debt (8.7 per cent of the GDP) despite the necessary rupee depreciation in 2019 and the challenges posed by the Covid-19 pandemic. Syed acknowledged the government’s efforts to manage the pandemic and debt levels during this period.

Political instability in 2022 led to a significant increase in the fiscal deficit due to unfunded energy subsidies. This, combined with low real interest rates and rupee depreciation, contributed to further debt increases in 2023.

Syed added: “So there you have it: a sad saga of wasted debt relief and foreign aid during the Musharraf era, fiscal profligacy in the PPP era, an artificially repressed exchange rate in the PML-N era, and creditable policy adjustments in the PTI era, but finally giving way to populism and fiscal indiscipline in the wake of political turbulence.”

“That is the sad story of how Pakistan wasted the debt relief of 2000-2001 and why debt has rebounded spectacularly in the last 15 years. Everyone shares at least some of the blame,” he added.